The Nightmare Machine was one of Borborygmus Gog's experiments, and a part of Project Starscream. Gog's goal was to find a way to use a being's fears as a weapon against them. In this experiment, which was disguised as an amusement attraction at Hologram Fun World, visitors would enter a room where they were told a machine would scan their brains to discover their worst fears in order to create vivid holograms of these fears for their entertainment.
However, this explanation was merely a ruse to hide the true nature of the experiment. No known technology had the ability to scan a being's mind to such a level (or there would be no need for the crude methods employed by interrogation droids), but certain telepathic species did have such an ability. A member of such a species, kept effectively invisible by the holographic projection of an empty room, was exactly what Gog used in this experiment.
Zak Arranda and Tash Arranda once unknowingly participated this experiment. After showing them their fears, Gog's creature made them think they had exited the attraction, while in truth they hadn't. They continued to experience nightmares, including their own Uncle Hoole betraying them. When they eventually realized none of it was real, they woke up and found they were in the same room, now occupied by themselves and other victims. All of them had tendrils attached to their foreheads leading directly to a spindly creature with glowing red eyes and a bulbous skull. Shortly after, the beast was killed by Lando Calrissian, who was currently visiting Hologram Fun World.